Reverse Stock Split

What is a Reverse Stock Split?

A reverse stock split is a type of corporate action in which a company reduces the total number of its outstanding shares in the open market. It’s the opposite of a stock split, in which a share is divided into multiple parts.

Reverse Stock Splits Defined

The goal is to consolidate the number of existing shares. It’s also known as a stock merge, stock consolidation, or share rollback.

A reverse stock split doesn’t change a corporation’s value. However, it is usually done because a corporation’s share value has lost significant value.

Reverse Stock Split Example

A biotech company has one million outstanding shares in the market, trading at $10 per share. These outstanding shares are held by shareholders, whether individual or institutional investors. The biotech company wants to perform a 1-for-2 reverse stock split. This means merging 2 shares into 1 new share. After the corporate action is completed, the company will have only 500,000 outstanding shares (1 million shares / 2), each valued at $20 ($10×2).

Before Reverse Split Market Cap = Original # of total shares x Earlier price per share
$10,000,000 = 1,000,000 x $10

After Reverse Split Market Cap = New # of total shares x New price per share
$10,000,000 = 500,000 x $20

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